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Sunday, November 27, 2011

Investment companies charge investors a wide assortment of fees. Mutual funds that are just coming to market, for example, may set the price for the initial sale of shares slightly higher than the shares' NAV to help defray start-up costs.

Sales Fees:Frequently, funds charge some sort of sales fee or "load". A front-end load is a sales commission charged to investors when the shares are purchased. A back-end load, or redemption fee,is charged to investors when theysell shares and exit the fund.

Ostensibly, these fees help reduce the frequency of trading in and out of the fund and encourage investors to maintain their positions. Although these are one-time charges, it makes sense to look at them in terms of an investor's time horizon. So, for example, a front load fee of 4.8% on a $10,000 share purchase ($480) translates to a per-year cost of $160 when an investor holds the shares for only three years ($480/3). If the investor holds the shares for 10 years, however, his cost per year is only $48. To make fee comparisons easy, services such as Morningstar calculate the cost of buying and holding $10,000 of a fund's shares over three-, five- and 10-year time horizons. Sales commissions provide an incentive to the sales force but they can seriously impact investors' total return.

Management fees are fixed fees that a mutual fund manager charges investors for her services and work with the fund. They are usually categorized as administrative fees or management fees.

12B-1 feesallow a mutual fund to collect a small fee from investors. This fee is designated for promotions, sales, or any other activity connected with the distribution of the fund's shares. The fee must be reasonable: 0.5% to 1% of the fund's net assets and up to a maximum of 8.5% of the offering price per share.

In choosing between two funds with similar features and performance, the fund with the lowest total fees will always be more appealing to investors. One way to compare fees is to look at the fund's expense ratio. This is presented in the annual report as well as in the prospectus. Average fees vary according to asset class: bond funds typically have a lower expense ratio than U.S. stock funds which, in turn, generally charge less than international stock funds.